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What Happens If the Price of Bitcoin Crashes?
What happens if the price of bitcoin crashes? Some say that it will go to zero, Others insist the price will keep rising because Crypto has crashed before.
The Bitcoin⚡️ Energy Standard
November 01, 2022
Table Of Content
Content
Introduction
Conclusion
FAQ
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Although some Bitcoin devotees may disagree, the vast majority of industry professionals are in agreement that the recent spike in the price of Bitcoin is a bubble. For them, the issue is not if the price will collapse but when it will crash. What would the consequences of such a collision be? There is a related issue that has to be answered.
Will a Bitcoin Price Crash Affect the Entire Economy?
Digital currencies received a passing mention in the report that was recently published by the Financial Stability Oversight Commission (FSOC), which detailed threats to the nation's financial stability. According to the organization, virtual currencies' effect on the financial system's stability is "extremely limited." This is probably due to the fact that the environment around bitcoin right now is not that large.
Subprime mortgages were the last significant financial instrument that contributed to the instability of the US economy. This crisis was brought on by the simultaneous occurrence of a tangled web of contributing elements. Participants actively involved in the process included actors from the conventional economy. To provide just one example, subprime creditors all throughout the United States obtained bad loans. These loans were then repackaged into derivative products and sold to investors, who then propagated these sales across many areas of the economy. Big multinational banks repackaged these loans as derivative securities. Thanks to collateralized loan obligations, the use of debt has spread much farther around the world.
During the worst of the financial crisis, Citigroup Inc. (C) was believed to have originated subprime mortgages in the amount of $19.7 billion. Bear Stearns, an investment bank that failed because of the financial crisis, had a "vast portfolio" of derivative financial instruments that were linked to subprime mortgages.
On the other hand, Bitcoin has not yet emerged victorious from its renegade position inside the financial services ecosystem. The rise in its pricing has taken place inside the constraints of unregulated exchanges, which have not yet been put through the vetting process by regulatory organizations. According to the most current data, the most significant participants in these exchanges are individual investors as well as bots. (For an explanation of why cryptocurrencies have buy and sell walls, see this related article.)
Large financial institutions like banks and investment businesses have, for the most part, refrained from participating in the bitcoin mania, and as a result, their exposure to cryptocurrency markets, if any at all, is minimal. Even though it's true that the value of bitcoin-related stocks has gone up, there are still not that many of them.
Even though the price of bitcoin has increased by more than 1,800 percent over the course of this year, the reaction to trading in CBOE futures has been rather muted, which may be seen as a sign of the industry's overall level of caution. Recent reports say that Goldman Sachs requires a 100% margin for all bitcoin transactions. This is true even if the company is acting as a clearing agent for CBOE bitcoin futures.
The bursting of the bitcoin bubble might end up being analogous to the "tulip frenzy" that took place in Amsterdam in the early 17th century. This phenomenon happened at about the same time as the subprime mortgage crisis. Because "cobblers, carpenters, bricklayers, and woodcutters" were involved in that bubble, the price of tulip bulbs from Turkey went through the roof at that time.
However, the decline in tulip prices had very little impact on the Dutch economy as a whole since serious financiers avoided the market. According to Nicolaas Posthumus, a Dutch historian, the only people who engaged in driving up the price of tulips out of avarice and a desire to make a profit were casual dealers. At the end of the day, these individuals were the ones that were impacted when prices dropped. Similarly, a fall in the price of bitcoin will cause a sell-off and will only impact a select group of individuals.
What Will Happen to the Cryptocurrency Ecosystem?
According to a recent report published online by Axios, the potential monetary effect of a bitcoin meltdown is somewhere in the neighborhood of $250 billion. However, this assessment reflects an inaccurate understanding of the usefulness of cryptocurrencies and their markets. The blockchain technology, which forms the basis of bitcoin, has already attracted a significant amount of investment. In addition to this, the swings in the price of bitcoin show that it is becoming a store of value. Cryptocurrencies are also valuable as a medium of exchange for value within closed ecosystems.
Having said that, it will be some time before their usefulness is seen in applications that are considered more standard. The price increase seen across the board for cryptocurrencies is mostly the consequence of a domino effect triggered by the rise in the value of bitcoin. A drop in the price of bitcoin may result in a correction in the prices of other cryptocurrencies. It is also unavoidable that the overwhelming majority of the cryptocurrencies that are now included in the listings will be removed. The only digital currencies that will survive a crisis are those that have clearly defined business strategies and an obvious value in mainstream culture.
Conclusion
Crashes are temporary phenomena, so keep that in mind. Though unpleasant in the short term, they promise to be rather exciting in the long run. Let's say the economy as a whole improves, but equities remain in a prolonged bear market. If and when the value of cryptocurrency drops to a new low, this might provide a great opportunity for investors. This means that cryptocurrencies may be tied to the markets in the short term, but they have a good chance of doing better in the long run.
FAQ
Does the price of Bitcoin ever drop?
A number of industry professionals have expressed concern that the price of bitcoin would drop much further, even reaching $12,000. A number of important macroeconomic events, such as the rise in the federal reserve rate and the release of inflation data, have had a big impact on how the price of bitcoin is predicted.
What will happen if the value of Bitcoin drops to zero?
If Bitcoin were to fail in this manner, it would very certainly bring down the value of a great number of other cryptocurrencies as well. For instance, if investors notice that the most valuable coin in the cryptocurrency market has lost all value, many of them will probably cash out as quickly as possible to prevent more losses. This is because investors want to protect themselves from further losses.
Will the value of cryptocurrencies increase if the stock market tumbles?
Will there be a rise in the price of bitcoin if the stock market crashes? Certainly not in every case. However, compared to equities at the beginning of the coronavirus epidemic, bitcoin did not do any better than stocks. Those who advocate for bitcoin consider it a diversifier in well-balanced portfolios. Investors panicked and liquidated everything, which led to this situation.
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
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